Intraday Market Thoughts

Brexit Feared for the Wrong Reason

by Adam Button
Jun 15, 2016 0:27

UK trade and the direct knock-on effects are the reasons widely touted as the reasons to fear a Brexit but something else is also afoot. The yen was the top performer on Tuesday while pound continued to plunge.  The Asia-Pacific calendar is light, but the UK claimant count is due later ahead of the FOMC decision. A new set of Premium trades will be issued on Wednesday ahead of the Fed. Ashraf posted the chart below on Friday, warning on how the upward divergence in the S&P500 would eventually catch "down" with falling yields and USDJPY. The ensuing 4 days did just that.

Click To Enlarge
Brexit Feared for the Wrong Reason - Jpy Spx Yields Ppoint June 15 (Chart 1)

Shifting winds

The Brexit vote will probably fail but it's no longer a sure thing.Like the old economic models, the models of voter behaviour are breaking down. The dominant trend of the past 30 years has been towards open borders and open trade. That it will continue has been taken for granted.

A Brexit would undoubtedly create hardships for UK trade that may or may not be resolved with quickly-signed trade deals but the trend is clear -- the public is losing faith in economic orthodoxy.

The promise of globalization and free trade has been wealth creation, which largely occurred but distributing that wealth has failed. Voters feel cheated new and want to try something new, maybe something radical.

Perhaps we should have paid more attention to Greece when voters rejected the bailout deal. It was easy to ignore because Tsipras cast aside the result, accepted EU terms and was re-elected.

Like the Brexit vote, Trump may also lose but by winning the Republican nomination he's tapped into the same anger that's fuelling a Brexit.

The UK economic effects of a Brexit are assuredly overstated by the 'remain' side but the effects of a reversal of globalization will be far more dangerous and tumultuous. If it doesn't happen because of a Brexit or Trump, it will likely be a result of what seems like the inevitable failure of the Trans Pacific Partnership.

Tuesday, in a sign of desperation, Osborne said he will raise taxes if the 'leave' side wins. The pound has been the victim so far but fears are beginning to spread

The short-term trade will certainly be centred around the referendum but no matter the result, the bigger picture trade may be a reversal of the open trade and open borders trend. Gold anyone?


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